How is the depreciation expense calculated under the unit production method?

The depreciation expense under the unit production method is calculated as the original cost of the asset minus its residual (or salvage) value, divided by the total estimated number of units the asset is expected to produce over its useful life. This method allocates the cost of the asset based on the actual usage, making it suitable for assets whose wear and tear corresponds closely to the volume of production they generate.

Using this approach allows for a more accurate reflection of the usage of the asset in relation to its cost and remaining value. Each unit produced incurs a portion of the total depreciation expense, resulting in variable depreciation charges that can closely align with the asset's productivity over time. This method is especially useful in manufacturing settings where production levels can fluctuate significantly.

Other methods, such as providing a stable amount based on equipment lifespan or deriving a cost per unit times annual production, may not accurately represent the relationship between the asset's usage and its cost, which is why they aren't appropriate for this context.